Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group.

The ability of government to repay its debt determines the interest rate on its debt. Government must increase its income by increasing revenue based upon the growth of the private sector; or it must reduce the cost of government.

The first sentence of this article stated that fiscal recklessness was not the cause of the debt crisis and it gave examples of the well managed !!?? Spanish and Irish governments. By the third paragraph it gave blatant examples of fiscal recklessness taking place in these countries, which created the the real-estate bubble.
The governments of these countries derived tax revenues from these speculative investments done by the private sector and were conveniently blind to the
looming danger they posed .
The " governments were forced to socialize private-sector liabilities " when the speculative boom collapsed.
" From this perspective austerity is the necessary and just penance for reprobates like Greece ,Spain and Italy'
While this approach maybe morally correct it is economically suicidal as the article makes clear, so some burden sharing is inevitable.

I beg to differ with Ms Tyson on the basics of the European (and not only) fiscal problem.

The term 'growth' is used far to easily. Growth depends on household consumption, what is manufactures, shipped, serviced, etc. Yet, household spending is shrinking and has been doing so for many years. This is especially true in Europe where the population is getting older, birth rates are under 1.8 pointing at an inevitable future shrink, many immigrants are net expenses and, very important, a massive shift of jobs to SE Asia took place.

I fail to understand how investments in infrastructure will provide more future jobs: people lack financial resources to use such infrastructure, it creates only short term government spending (serving very specific sectors), boosts profits of infrastructure contractors and return some of the government's funds as taxes. This will not create long term increase of all households income and respective cosumerism that fuels growth.

Issuing EURO Bonds is another laundered way to increase public debt. Public debt is huge as is, especially when compared to long term earning potential in shrinking populations and economies. These will affect GDP's mostly due to internal cash transfer 'inside the family', rather than from real manufacturing, production and exports.

Economists, who don't want to be carriers of bad news, need to face the fact that this balloon has inflated to its limits much like Japans 1990s' real-estate crash which froze the economy for over a decade. A new order will come to life and should be put in place. It should avoid repeating the errors that brought us to where we are. It should consider the realistic posibilty that economies will shrink, standard of living will be reduced and that globalization shifted riches from west to east.

There seems to be an interesting gap between the underlying issues and proposed cures.

Spain's growth was built on an unsustainable increase in real estate "value". Italy and France's economy are overloaded with regulations and a costly public service. Greece simply cheated it's neighbours throughout years. And Germany was happy too to increase debt beyond agreed levels when needed. So where is the solidarity aspect which has been so oft brought up by the EU leaders? It seems that in this UNION, everyone has been (and will be) maximizing their local interests.

If this is the underlying problem, it is hard to believe that neither austerity nor the growth "concept" will be a sustainable solution.

This crisis is an example to the thesis that in the real world, fiscal and monetary union are two parts of the same coin. Pull them apart and ...

Nowadays it is usual to say that austerity is the wrong cure that worse the disease. For what I see in Italy I do not see any "austerity". This word, long time ago, means spending more wisely and do more with less.

What I see in Italy is the same level and the same low quality of public spending but a new and extreme, I repeat extreme fiscal pressure.

So there is no way to recover! In fact Italy is already in a depression even if no one dime of public spending has been reduced.

While it is true that most of these countries are in need of reform on a range of issues however when you get into the issue of politics, the tendency to skirt responsibility is magnified by the desire to win and pin blame on the other side.

You ignored the cause of the problem in the first place and that problem stems from issuance of easy credit to finance whatever the wants are which Ms. Tyson addressed here and that has been going on since the late 1980s until the bubble popped in 2007. Many of the banks and Wall Street were eager to do it because it offers them opportunities to make money and securitization provided the avenue to generate all kinds of variable products never mind the risk because it is someone else's problem to solve hence why many governments bailout their financial institutions because letting it fail will cause a bigger problem. What I don't see is the needed reforms the banks should be imposing on itself to correct the defect they created in the first place. Just like Ms Tyson stated: the deterioration was predictable.

I can understand Germany's view that needed reforms are needed however the EU consist of rich and poor nations, just like what we have in the US but on a different level however the each of the countries are wedded to the Euro and they can not do anything beyond making painful adjustment which is why Merkel's party lost two state elections and Mr. Hollande's victory caused her of modify her stance just to keep the Euro intact. Germany's solution sounds like a one size fits when it is several things going at the same time.

You state it is a recession when it is really a Depression caused by the financial crisis and even model countries needs a bailout unless they enacted reform to prevent from happening in years prior to 2007.

In rebuttal to Ms. Tyson’s argument, one only needs to reiterate many of the points already made by the Germans. For example:

1) The issuance of Eurobonds relieves other nations of the need to make painful and unpopular reforms. Eurobonds mean reforms will not be made, interest rates will once again be equalized in the EU, and excessive borrowing in the peripheral countries will resume.

2) Debtor countries already receive substantial aid or have access to it, but still resist implementing reforms that will lead to growth and competitiveness.

3) Mr. Hollande, the newest voice for growth and reforms, has pledged to lower the French retirement age back to 60. That will make French public finances worse and add nothing to GDP or competiveness. These are the kind of “reforms” the Germans are worried about.

4) Ms. Tyson states that Spain and Ireland were models of fiscal rectitude before the recession. She then points out, “The reality is that the rest of Europe cannot succeed in restoring growth without Germany.” There is an obvious contradiction here. Model countries do not require bailouts from other countries when recessions hit.

To understand the German point of view, Americans need only convert the numbers involved to an equivalent in the US economy. For example, it has been estimated that the cost of bailing Spain’s banks and governmental units will cost around $350B. Would Americans be willing to bail out Mexico at a cost of $1.25 trillion, knowing that other countries in the region would soon line up for their bailouts as well?

Finally, it is unfair to discredit the German position by equating it to moral or religious vengeance. As a result of their economic history, Germans may have different beliefs about the likely outcomes of certain policies than others do. However, there are many mainstream economists who question the simplistic Keynesian solution as well.

The suggestions from the article sound logical.
One question though: where would further growth come from?
When will we become brave enough to face the facts that our present constant quantitative growth economic model, that is built on overproducing and over consuming excessive, unnecessary products, buying them beyond means requiring more and more credit, has exhausted itself due to multiple converging factors and this is why we are in a crisis, or more precisely system failure?
Until we are ready to open up the root cause of the disease we cannot even hope for a cure.

New Comment

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Log in

Register

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.